Russia casts cloud over Europe’s auto groups

The Geneva Motor Show kicks off this week amid growing optimism for European automakers – but they're not popping open the champagne just yet.

Car sales in the region kicked off the first month of the year with a 6.7 percent increase over 2014 – the 17th straight month of gains in a row.

The European Central Bank's quantitative easing program is set to provide additional tailwinds for the sector, thanks to a weaker euro and an uptick in consumer sentiment. In another boon for the sector , the dramatic decline in oil prices is trickling down to lower prices at the pump, helping to drive demand for high-margin SUVs.

Despite the improving backdrop, manufacturers are keeping an eye on the uncertainty in Russia. Analysts expect the Russian market, once a high-growth haven, to slump further in 2015 after a 10 percent decline last year. The annual drop-off was exaggerated by a 24 percent dip in January after foreign brands rushed to raise prices on the back of the falling ruble.

"The size of the market contraction in Russia is the biggest wild card facing vehicle manufacturers across the European continent, if not the world, in 2015 and 2016," said Nigel Griffiths, chief automotive economist, IHS Automotive. The industry group expects Russian market sales to slump to just 1.8 million units in 2015, a 27 percent decline over last year and nearly 40 percent below the level in 2012. PwC, meanwhile, says the decline could be up to 35 percent.

Volkswagen has already set the stage for what will likely be a re-occurring theme at Geneva this week: blaming factors outside of Europe for a subdued outlook. Chief financial officer Hans Dieter Poetsch said in a statement tied to the carmaker's full-year earnings that "continuing political uncertainty, strong currency fluctuations and tough environments in markets such as Russia and Brazil present major challenges."

This warning comes a few weeks after Volkswagen said it lost hundreds of millions of euros in Russia because of the ruble rout.

Ford Motor Company also cited Russia as a major reason for lowering its European outlook last month. The US automaker says European losses will narrow from the $1 billion reported in 2014 but will be wider than the $250 million previously forecast. Meanwhile, US rival General Motors has joined several other manufacturers scaling back production in Russia. GM says it will suspend work at its St. Petersburg plant from mid-March to mid-May. French auto giant Renault also put the brakes on its Moscow factory for three weeks.

Nevertheless, industry analysts are staying optimistic on the sector. Barclays suggests that the Russian factor has largely been priced in to equities, naming Renault as their top pick. Meanwhile, Citi analysts point to high US sales exposure and strong relative earnings momentum as reasons to be bullish on the sector. Citi names VW and Renault as preferred stock picks.